I Own No Mutual Funds

Humans can accomplish a lot when we pool our resources together. The most notable buildings in northwest Missouri are a result of communities putting their money together to erect such architecture, think, school buildings. Pooling resources opens up options we don’t have on our own.

Pooling money to open up more investment options is a concept that dates back longer than history can accurately track. But modernly, many remember when pooling of our financial resources became mainstream in the 1990's. That is largely when mutual funds came from Wall Street to enter the homes of Main Street. 

The bull market of the 1990’s caused many new investors to take interest in publicly traded stocks for the first time, particularly emerging internet stocks. But most middle class Americans couldn’t afford to buy enough stocks to adequately diversify their money. 

This led people to demand financial products that allowed them to pool their money together so they could use that buying power to buy fractional parts of multiple stocks, therefore lowering risk and transaction costs. For a relatively small expense, a middle American, middle class family could now own thousands of American and international stocks. 

Does it shake your trust in me as a financial advisor if I confess that I don’t own a single mutual fund? It’s true. But it’s not because I don’t believe strongly in owning a low-cost, diversified portfolio of stocks. It’s because there is now a better option to achieve the same thing: the ETF.

An ETF, or exchanged traded fund, is a more cost and tax efficient version of a mutual fund. However, as ETFs have gained popularity in the US, many have come out against ETFs as an investment vehicle, even warning people about their “dangers”. The leading voice of the opposition was Jack Bogle, founder of Vanguard funds. I’ve written previously how I’ve been inspired by Jack Bogle, but I disagree with him on this debate. 

Bogle denounced ETFs because they made it too easy to make mistakes as compared with mutual funds. His argument was that mutual funds short-comings and restrictions were actually what made them a better investment vehicle for American investors. 

If you don’t have a process for keeping you from making bone-headed moves with your investments, then maybe mutual funds are better for you. But if you’re high risk for such stupid moves, I don’t think choosing mutual funds will make much of a difference. Instead you should get professional help….quickly, before it’s too late.

As for me and my house and my clients, we are going to use the most effective and efficient investment tools available to us, and currently that is ETFs. 

A final important point: ETFs and mutual funds are investment vehicles, but they are not investments in themselves. Your money doesn’t go TO an ETF, it goes THROUGH an ETF. Money goes through the ETF to the actual investment, which could be a company stock, a commodity, a bond, or a derivative of some sort.